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HK SFC Reveals Plans For Reforming Prospectus Regime

by Mary Swire, for, Hong Kong

26 September 2006

Hong Kong's Securities and Futures Commission on Friday released the Consultation Conclusions on the reform initiatives proposed under a drive to modernise the regime governing the public offering of shares and debentures in the Companies Ordinance.

In August last year, the SFC consulted the public on 21 reform initiatives relating to the CO prospectus regime and received 26 submissions from market practitioners, issuers and professional bodies.

There was broad support for the majority of the initiatives, but certain of the proposals have been revised in light of public comments received.

Brian Ho, the SFC’s Executive Director of Corporate Finance, announced last week that:

“Implementation of the initiatives proposed to be taken forward will more closely align Hong Kong's public offering regime with that of other leading jurisdictions and support Hong Kong's continuing role as an international financial centre."

"Consolidation of all securities laws in a single piece of legislation marks a significant step after the implementation of the Securities and Futures Ordinance in our drive to conform the regulatory philosophy and eliminate opportunities for regulatory arbitrage.”

Some of the key initiatives proposed and consulted upon were:

  • To consolidate securities laws in a single piece of legislation, the provisions in the CO relating to the public offering of shares and debentures will be moved to the Securities and Futures Ordinance (SFO) as a discrete part separate from the investment advertisement regime in Part IV of the SFO.
  • To harmonise the legal and regulatory treatment of investment arrangements and instruments with broadly similar risk and reward exposure, public offers of structured products will be subject to regulation under Part IV of the SFO, whilst plain vanilla share or debenture offers will be governed under the separate prospectus regime. This should reduce regulatory arbitrage.
  • The focus of the prospectus regime will be changed from a “document-based” to a “transaction-based” approach by regulating the act of offering rather than any document containing the offer.
  • Offerors will be regulated without regard to place of incorporation or their legal form. This will bring the prospectus regime into line with the investment advertisement regime in Part IV of the SFO, which regulates advertisements and invitations issued by any person, whether made in writing or otherwise.
  • To attach liability unequivocally to specified persons responsible for the prospectus, prospectus liability will be imposed on (i) the issuer and/or the offeror of the shares or debentures; and (ii) each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus. In view of the market response and the new Guidelines for Sponsors and Compliance Advisers issued by the SFC which will come into effect on 1 January 2007, imposition of prospectus liability on sponsors is viewed as premature.
  • In order to provide investors with withdrawal rights where materially adverse new developments occur prior to the results of allocation being announced, the issuer of the prospectus will be required to publish a supplemental prospectus and provide successful applicants with a right to withdraw their allocations and be repaid in full. The offer period will not be required to be extended or re-opened – this will allow the scheduled date for refund of surplus application moneys and unsuccessful applications to remain unchanged.

According to the SFC, the following proposals will not be taken forward at this stage:

(i) Proposal 9 – to extend the classes of persons who may claim compensation for a misstatement in a prospectus to subsequent purchasers who buy in the secondary market;

(ii) Proposal 10 – to remove the requirement for claimants to prove that they have actually read and relied on the prospectus when making a claim for compensation;

(iii) Proposal 17 – to extend the 3-day waiting period before allotments of shares or debentures in the case of initial public offers of shares or debentures and the removal of the 3-day waiting period for allotments in the case of public offers of shares or debentures of a class already listed;

(iv) Proposal 18 – to provide that an application form or procedure for shares or debentures may not be distributed or implemented by any person unless it is accompanied by or contained in a prospectus which complies with the prospectus provisions or is exempted from them;

(v) Proposal 20 – to introduce a separate regulatory regime to regulate offers to employees and their dependants, including a requirement for a declaration of solvency and going concern by the directors and auditors of the company; and

(vi) Proposal 21 – to provide that an issue or sale of securities in contravention of the law should be void or voidable.

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